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Tài liệu hay Acca f6 taxation UK FA 2016 bpp study text applicable upto march 2018

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TAXATION (UK)
FA 2016

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PAPER F6

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BPP Learning Media is an ACCA Approved Content Provider. This means we work
closely with ACCA to ensure this Study Text contains the information you need to pass
your exam.
In this Study Text, which has been reviewed by the ACCA examining team, we:
Highlight the most important elements in the syllabus and the key skills you need



Signpost how each chapter links to the syllabus and the study guide



Provide lots of exam focus points demonstrating what is expected of you in the exam



Emphasise key points in regular fast forward summaries



Test your knowledge in quick quizzes



Examine your understanding in our practice question bank



Reference all the important topics in our full index

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BPP's Practice & Revision Kit also supports this paper.

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FOR EXAMS IN JUNE 2017, SEPTEMBER 2017,
DECEMBER 2017 AND MARCH 2018

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First edition 2007
Tenth edition October 2016

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Dear Customer

ISBN 9781 5097 0787 4
(Previous 9781 4727 4423 4)
eISBN 9781 5097 0794 2

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Contents

Page

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Introduction
Helping you to pass
Studying F6
The exam paper

v
vii
ix

Part A UK tax system
1

Introduction to the UK tax system

3

Computing taxable income and the income tax liability
Employment income
Taxable and exempt benefits. The PAYE system
Pensions
Property income
Computing trading income
Capital allowances
Assessable trading income
Trading losses
Partnerships and limited liability partnerships
National insurance contributions

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2
3
4
5
6
7
8
9
10
11
12

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Part B Income tax and national insurance contributions

17
45
57
79
91
101
121
141
153
169
179

Part C Chargeable gains for individuals
13
14
15
16

Computing chargeable gains
Chattels and the principal private residence exemption
Business reliefs
Shares and securities

191
205
217
229

Part D Tax administration for individuals
Self assessment and payment of tax by individuals

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17

241

Part E Inheritance tax
18

Inheritance tax: scope and transfers of value

261

Part F Corporation tax

Computing taxable total profits and the corporation tax liability
Chargeable gains for companies
Losses
Groups
Self assessment and payment of tax by companies

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20
21
22
23

287
303
315
327
337

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Part G Value added tax
An introduction to VAT
Further aspects of VAT

351
373

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Practice question and answer bank
Tax tables
Index
Review form

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483

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Helping you to pass
BPP Learning Media – ACCA Approved Content Provider

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As ACCA's Approved Content Provider, BPP Learning Media gives you the opportunity to use study
materials reviewed by the ACCA examination team. By incorporating the examination team's comments
and suggestions regarding the depth and breadth of syllabus coverage, the BPP Learning Media Study
Text provides excellent, ACCA-approved support for your studies.

The PER alert!

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Before you can qualify as an ACCA member, you not only have to pass all your exams but also fulfil a three
year practical experience requirement (PER). To help you to recognise areas of the syllabus that you
might be able to apply in the workplace to achieve different performance objectives, we have introduced
the 'PER alert' feature. You will find this feature throughout the Study Text to remind you that what you
are learning to pass your ACCA exams is equally useful to the fulfilment of the PER requirement.

Tackling studying

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Your achievement of the PER should be recorded in your online My Experience record.

Studying can be a daunting prospect, particularly when you have lots of other commitments. The different
features of the Study Text, the purposes of which are explained fully on the Chapter features page, will
help you whilst studying and improve your chances of exam success.

Developing exam awareness

Our Study Text are completely focused on helping you pass your exam.

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Our advice on Studying F6 outlines the content of the paper and the necessary skills you are expected to
be able to demonstrate and any brought forward knowledge you are expected to have.
Exam focus points are included within the chapters to highlight when and how specific topics were
examined, or how they might be examined in the future.

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Testing what you can do

Testing yourself helps you develop the skills you need to pass the exam and also confirms that you can
recall what you have learnt.

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We include Questions – lots of them – both within chapters and in the Practice Question Bank, as well as
Quick Quizzes at the end of each chapter to test your knowledge of the chapter content.

Introduction

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Each chapter contains a number of helpful features to guide you through each topic.

Topic list

Syllabus reference

Tells you what you will be studying in this chapter and the
relevant section numbers, together with ACCA syllabus
references.

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Topic list

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Chapter features

Introduction

Puts the chapter content in the context of the syllabus as
a whole.

Study Guide

Links the chapter content with ACCA guidance.

Exam Guide

Highlights how examinable the chapter content is likely to
be and the ways in which it could be examined.

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Summarises the content of main chapter headings,
allowing you to preview and review each section easily.

FAST FORWARD

Demonstrate how to apply key knowledge and
techniques.

Key terms

Definitions of important concepts that can often earn you
easy marks in exams.

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Examples

Tell you when and how specific topics were examined, or
how they may be examined in the future.

Exam focus points

Formulae that are not given in the exam but which have to
be learnt.

Formula to learn

Gives you a useful indication of syllabus areas that
closely relate to performance objectives in your Practical
Experience Requirement (PER).
Gives you essential practice of techniques covered in the
chapter.

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Question

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Chapter Roundup

A full list of the Fast Forwards included in the chapter,
providing an easy source of review.
A quick test of your knowledge of the main topics in the
chapter.

Practice Question Bank

Found at the back of the Study Text with more
comprehensive chapter questions. Cross referenced for
easy navigation.

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Quick Quiz

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Introduction

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Studying F6

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As the name suggests, this paper examines the basic principles of taxation. This is a very important area
for certified accountants as many areas of practice involve a consideration of taxation issues. It also
provides a foundation for P6: Advanced Taxation which will be chosen by those who work in a tax
environment.

Members of the F6 examination team have written several technical articles including two on Inheritance
Tax, two on chargeable gains, one on groups, two on VAT, one on benefits, one on motor cars, one on
adjustment of profit and one on Finance Act 2016. All these articles are available on the ACCA website.
Make sure you read them to gain further insight into what the F6 examination team is looking for.

1 What F6 is about

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You are introduced to the rationale behind – and the functions of – the tax system. The syllabus then
considers the separate taxes that an accountant would need to have a detailed knowledge of, such as
income tax from self-employment, employment and investments, the corporation tax liability of
individual companies and groups of companies, the national insurance contribution liabilities of both
employed and self employed persons, the value added tax liability of businesses, the chargeable gains
arising on disposals of investments by both individuals and companies, and the inheritance tax liabilities
arising on chargeable lifetime transfers and on death.

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You will be expected to have a detailed knowledge of these taxes, but no previous knowledge is
assumed. You should study the basics carefully and learn the pro forma computations. It then becomes
straightforward to complete these by slotting in figures from your detailed workings.
As well as being able to calculate tax liabilities, you may be required to explain the basis of the
calculations, apply tax planning techniques for individuals and companies and identify the compliance
issues for each major tax through a variety of business and personal scenarios and situations.

2 What skills are required?



Be able to integrate knowledge and understanding from across the syllabus to enable you to
complete detailed computations of tax liabilities.
Be able to explain the underlying principles of taxation by providing a simple summary of the rules
and how they apply to the particular situation.
Be able to apply tax planning techniques by identifying available options and testing them to see
which has the greater effect on tax liabilities.

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3 How to improve your chances of passing
There is no choice in this paper, all questions have to be answered. You must therefore study the
entire syllabus, there are no short-cuts.



The first section of the paper consists of 15 objective test questions, worth two marks each. These
will inevitably cover a wide range of the syllabus.



The second section of the paper also consists of 15 objective test questions, worth two marks
each. However, they are linked to a scenario. You must make sure you understand the scenario
before attempting the questions.



Practising longer questions set in the third section of the paper under timed conditions is
essential. BPP's Practice & Revision Kit contains 10 mark and 15 mark questions on all areas of
the syllabus.



Answer all parts of the question. Even if you cannot do all of the calculation elements, you will still
be able to gain marks in the discussion parts.

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Introduction

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Answer selectively – the examination team will expect you to consider carefully what is relevant
and significant enough to include in your answer. Don't include unnecessary information.



Keep an eye out for articles as the examination team will use Student Accountant to communicate
with students.

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Introduction

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The exam paper
Computer-based exams

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ACCA have commenced the launch of computer based exams (CBE's) for F5–F9. They have been piloting
computer-based exams in limited markets since September 2016 with the aim of rolling out into all
markets internationally over a five year period. Paper-based examinations will be run in parallel while the
CBEs are phased in and BPP materials have been designed to support you, whichever exam option you
choose.

Exam duration

The Skills module examinations F5–F9 contain a mix of objective and longer type questions with a
duration of three hours for 100 marks. For paper-based exams there is an extra 15 minutes to reflect the
manual effort required.

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As ACCA increase their offering of F5–F9 session CBEs, they will be introducing seeded content to
guarantee all exams are equivalent and fair. When the seeded content is introduced, students will be given
more time to complete the exams – increasing to 3 hours and 20 minutes to take into account the
inclusion of additional seeded content.

Format of the exam

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For more information on these changes and when they will be implemented, please visit the ACCA website.
http://www.accaglobal.com/uk/en/student/changes-to-exams/f5-f9-session-cbe.html

The exam format is the same irrespective of the mode of delivery and will comprise three exam sections:
Section

Style of question type

A

Objective test (OT)

B

Objective test (OT) case

Description

Proportion of exam, %

15 questions  2 marks

30

3 questions  10 marks

30

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Each question will contain 5
subparts each worth 2 marks

C

Constructed Response
(Long questions)

Total

1 question  10 marks

40

2 questions  15 marks
100

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Section A and B questions will be selected from the entire syllabus. The paper version of these objective
test questions contains multiple choice only and the computer-based versions will contain a variety. The
responses to each question or subpart in the case of OT cases are marked automatically as either correct
or incorrect by computer.

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The 10 mark Section C questions can come from any part of the syllabus. The 15 mark Section C
questions will mainly focus on the following syllabus areas but a minority of marks can be drawn from any
other area of the syllabus:



Income tax (syllabus area B)
Corporation tax (syllabus area E)

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The responses to these questions are human marked.

Syllabus and Study Guide

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The complete F6 syllabus and study guide can be found by visiting the exam resource finder on the ACCA
website: http://www.accaglobal.com/uk/en/student/exam-support-resources.html

Introduction

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Introduction

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UK tax system

A

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Topic list

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Introduction to
the UK tax system

Syllabus reference

1 The overall function and purpose of taxation in a
modern economy
2 Different types of taxes

A1(b), (c)

3 Principal sources of revenue law and practice

A2(a)-(c), (e), (f)
A2(d), (g)

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4 Tax avoidance and tax evasion

Introduction

A1(a)

We start our study of tax with an introduction to the UK tax system.

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First, we consider briefly the purpose of raising taxes, focussing on economic,
social and environmental factors. We next consider the specific UK taxes, both
revenue and capital, and also direct and indirect.
We see how the collection of tax is administered in the UK, and where the UK
tax system interacts with overseas tax jurisdictions.

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Finally, we highlight the difference between tax avoidance and tax evasion and
explain the need for a professional and ethical approach in dealing with tax. In
particular, we look at the situation where a client has failed to disclose
information to the tax authorities.

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When you have finished this chapter you should be able to discuss the broad
features of the tax system. In the following chapters we will consider specific
UK taxes, starting with income tax.

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Study guide
Intellectual
level
The overall function and purpose of taxation in a modern economy

(a)

Describe the purpose (economic, social etc) of taxation in a modern
economy.

1

(b)

Explain the difference between direct and indirect taxation.

2

(c)

Identify the different types of capital and revenue tax.

A2

Principal sources of revenue law and practice

(a)

Describe the overall structure of the UK tax system.

(b)

State the different sources of revenue law.

(c)

Describe the organisation of HM Revenue & Customs (HMRC) and its terms
of reference.

1

(d)

Explain the difference between tax avoidance and tax evasion, and the
purposes of the General Anti-Abuse Rule (GAAR).

1

(e)

Appreciate the interaction of the UK tax system with that of other tax
jurisdictions.

2

(f)

Appreciate the need for double taxation agreements.

2

(g)

Explain the need for an ethical and professional approach.

2

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A1

1

1

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Exam guide

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You may be asked a question on a specific topic from this part of the syllabus in either Section A or
Section B. An example would be to identify sources of revenue law. You are unlikely to be asked a whole
Section C question on this part of the syllabus. You may, however, be asked to comment on one aspect,
such as the difference between tax avoidance and tax evasion or how to act if a client has failed to disclose
information to the tax authorities, as part of a question.

FAST FORWARD

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1 The overall function and purpose of taxation in a
modern economy
Economic, social and environmental factors may affect the government's tax policies.

1.1 Economic factors

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In terms of economic analysis, government taxation represents a withdrawal from the UK economy
while its expenditure acts as an injection into it. So the government's net position in terms of taxation and
expenditure, together with its public sector borrowing policies, has an effect on the level of economic
activity within the UK.

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The government favours longer-term planning, and regularly sets out proposed plans for expenditure.
These show the proportion of the economy's overall resources which will be allocated by the government
and how much will be left for the private sector.

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This can have an effect on demand for particular types of goods, eg health and education on the one hand,
which are predominately the result of public spending, and consumer goods on the other, which results
from private spending. Changing demand levels will have an impact on employment levels within the
different sectors, as well as on the profitability of different private sector suppliers.

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1: Introduction to the UK tax system  Part A UK tax system

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Within that overall proportion left in the private sector, the government uses tax policies to encourage
and discourage certain types of activity.
It encourages:

Saving on the part of the individual, by offering tax incentives such as tax-free Individual Savings
Accounts (ISAs) and tax relief on pension contributions

(b)

Donations to charities through the Gift Aid scheme

(c)

Entrepreneurs who build their own business, through reliefs from capital gains tax

(d)

Investment in plant and machinery through capital allowances

(e)

Marriage and civil partnerships through the transferable personal allowance (marriage allowance).
Civil partners are members of a same sex couple which has registered as a civil partnership under
the Civil Partnerships Act 2004. Same sex couples can also marry in England, Wales and Scotland
(but not Northern Ireland).

(a)
(b)

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It discourages:

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(a)

Smoking and alcoholic drinks, through the duties placed on each type of product
Motoring, through fuel duties

1.2 Social factors

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Governments can and do argue that these latter taxes and duties to some extent mirror the extra costs to
the country as a whole of such behaviours, such as the cost of coping with smoking related illnesses.
However, the Government needs to raise money for spending in areas where there are no consumers on
whom the necessary taxes can be levied, such as defence, law and order, overseas aid and the cost of
running the government and Parliament.

Social justice lies at the heart of politics, since what some think of as just is regarded by others as
completely unjust. Attitudes to the redistribution of wealth are a clear example.

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In a free market some individuals generate greater amounts of income and capital than others and once
wealth has been acquired, it tends to grow through the reinvestment of investment income received. This
can lead to the rich getting richer and the poor poorer, with economic power becoming concentrated in
relatively few hands.
Some electors make the value judgement that these trends should be countered by taxation policies
which redistribute income and wealth away from the rich towards the poor. This is one of the key
arguments in favour of some sort of capital gains tax and inheritance tax, taxes which, relative to the
revenue raised, cost a great deal to collect.

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Different taxes have different social effects:

Direct taxes based on income and profits (income tax), gains (capital gains tax) or wealth
(inheritance tax) tax only those who have these resources.

(b)

Indirect taxes paid by the consumer (VAT) discourage spending and encourage saving. Lower or
nil rates of tax can be levied on essentials, such as food.

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(a)

Progressive taxes such as income tax, where the proportion of the income or gains paid over in
tax increases as income/gains rise, target those who can afford to pay. Personal allowances and
the rates of taxation can be adjusted so as to ensure that those on very low incomes pay little or no
tax.

(d)

Taxes on capital or wealth ensure that people cannot avoid taxation by having an income of zero
and just living off the sale of capital assets.

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(c)

Almost everyone would argue that taxation should be equitable or 'fair', but there are many different
views as to what is equitable.

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An efficient tax is one where the costs of collection are low relative to the tax paid over to the government.
The government publishes figures for the administrative costs incurred by government departments in
Part A UK tax system  1: Introduction to the UK tax system

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operating the taxation systems, but there are also compliance costs to be taken into account. Compliance
costs are those incurred by the taxpayer, whether they be the individual preparing tax returns under the
self assessment system or the employer operating the PAYE system to collect income tax or the business
collecting value added tax. Some of the more equitable taxes may be less efficient to collect.

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1.3 Environmental factors

The taxation system accommodates environmental concerns to a certain extent, especially concerns
about renewable and non-renewable sources of energy and global warming.
Examples of tax changes which have been introduced for environmental reasons are:

The climate change levy, raised on businesses in proportion to their consumption of energy. Its
claimed purpose is to encourage reduced consumption.

(b)

The landfill tax levied on the operators of landfill sites on each tonne of rubbish/waste processed
at the site. Its claimed purpose is to encourage recycling by taxing waste which has to be stored.

(c)

The changes to rules on the lease or purchase of cars, and taxation of cars and private fuel
provided for employees to be dependent on CO2 emissions. Its claimed purpose is to encourage
the manufacture and purchase of low CO2 emission cars to reduce emissions into the atmosphere
caused by driving.

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(a)

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Only the last of these will be directly felt by individuals, even if the other taxes are passed on by being
factored into a business's overheads.

2 Different types of taxes
FAST FORWARD

Central government raises revenue through a wide range of taxes. Tax law is made by statute.

2.1 Taxes in the UK

Central government raises revenue through a wide range of taxes. Tax law is made by statute.

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The main taxes, their incidence and their sources, are set out in the table below.
Suffered by

Source

Income tax

Individuals
Partnerships

Capital Allowances Act 2001 (CAA 2001); Income Tax
(Earnings and Pensions) Act 2003 (ITEPA 2003);
Income Tax (Trading and Other Income) Act 2005
(ITTOIA 2005); Income Tax Act 2007 (ITA 2007)

Corporation tax

Companies

CAA 2001 as above, Corporation Tax Act 2009 (CTA
2009), Corporation Tax Act 2010 (CTA 2010)

Capital gains tax

Individuals
Partnerships
Companies (which pay
tax on capital gains in the
form of corporation tax)

Taxation of Chargeable Gains Act 1992 (TCGA 1992)

Inheritance tax

Individuals
Trustees

Inheritance Tax Act 1984 (IHTA 1984)

Value added tax

Businesses, both
incorporated and
unincorporated

Value Added Tax Act 1994 (VATA 1994)

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Tax

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You will also meet National Insurance. National insurance is payable by employers, employees and the
self employed.

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1: Introduction to the UK tax system  Part A UK tax system

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The other taxes referred to in the previous section, such as landfill tax, are not examinable at F6.

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Further details of all these taxes are found later in this Study Text.

2.2 Revenue and capital taxes
Revenue taxes are those charged on income. In this Study Text we cover:
(a)
(b)
(c)

Income tax
Corporation tax (on income profits)
National insurance

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Finance Acts are passed each year, incorporating proposals set out in the Budget. They make changes
which apply mainly to the tax year ahead. This Study Text includes the provisions of the Finance Act
2016. This is the Finance Act examinable in the sessions in June 2017, September 2017, December
2017 and March 2018.

Capital taxes are those charged on capital gains or on wealth. In this Study Text we cover:
Capital gains tax
Corporation tax (on capital gains)
Inheritance tax

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(a)
(b)
(c)

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2.3 Direct and indirect taxes

Direct taxes are those charged on income, gains and wealth. Income tax, national insurance,
corporation tax, capital gains tax and inheritance tax are direct taxes. Direct taxes are collected directly
from the taxpayer.
Indirect taxes are those paid by the consumer to the supplier who then passes the tax to the
Government. Value added tax is an indirect tax.

3 Principal sources of revenue law and practice
Tax is administered by HM Revenue and Customs (HMRC).

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FAST FORWARD

3.1 The overall structure of the UK tax system
3.1.1 Her Majesty's Treasury

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Her Majesty's Treasury formally imposes and collects taxation. The management of the Treasury is the
responsibility of the Chancellor of the Exchequer.

3.1.2 Her Majesty's Revenue and Customs (HMRC)
The administrative function for the collection of tax is undertaken by Her Majesty's Revenue and
Customs (HMRC).

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The HMRC staff are referred to in the tax legislation as 'Officers of Revenue and Customs'. They are
responsible for supervising the self-assessment system and raising queries about tax liabilities.

3.1.3 Crown Prosecution Service (CPS)

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The Crown Prosecution Service (CPS) provides legal advice and institutes and conducts criminal
prosecutions in England and Wales where there has been an investigation by HMRC.

Part A UK tax system  1: Introduction to the UK tax system

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3.1.4 Tax Tribunal
(a)
(b)

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Tax appeals are heard by the Tax Tribunal which is made up of two tiers:
First Tier Tribunal
Upper Tribunal

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The First Tier Tribunal deals with most cases other than complex cases. The Upper Tribunal deals with
complex cases which either involve an important issue of tax law or a large financial sum. The Upper
Tribunal also hears appeals against decisions of the First Tier Tribunal. We look at the appeals system in
more detail later in this Study Text.

3.2 Different sources of revenue law
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The sources of revenue law are Acts of Parliament, Statutory Instruments and case law.

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As stated above, taxes are imposed by statute. This comprises not only Acts of Parliament but also
regulations laid down by Statutory Instruments. Statute is interpreted and amplified by case law.
HMRC also issue:

Statements of practice, setting out how they intend to apply the law

(b)

Extra-statutory concessions, setting out circumstances in which they will not apply the strict letter
of the law where it would be unfair

(c)

A wide range of explanatory leaflets

(d)

Revenue and Customs Brief. This is gives HMRC's view on specific points.

(e)

The Internal Guidance, a series of manuals used by HMRC staff

(f)

Agent Update, for tax practitioners.

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(a)

A great deal of information and HMRC publications can be found on the HM Revenue and Customs pages
of the UK Government website (www.gov.uk).

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Although the HMRC publications do not generally have the force of law, some of the VAT notices do where
power has been delegated under regulations. This applies, for example, to certain administrative aspects
of the cash accounting scheme.

3.3 The interaction of the UK tax system with that of other tax
jurisdictions
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3.3.1 The European Union

UK membership of the European Union has a significant effect on UK taxes, in particular value added tax
(VAT). This will continue until the UK leaves the European Union.

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Membership of the European Union has a significant effect on UK taxes although there is no general
requirement imposed on the EU member states to move to a common system of taxation nor to
harmonise their individual tax systems. The states may, however, agree jointly to enact specific laws,
known as 'Directives', which provide for a common code of taxation within particular areas of their
taxation systems.

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The most important example to date is Value Added Tax (VAT), where the UK is obliged to pass its laws in
conformity with the rules laid down in the European legislation. The VAT Directives still allow for a certain
amount of flexibility between member states, eg in setting rates of taxation. There are only limited
examples of Directives in the area of Direct Taxes, generally concerned with cross-border dividend and
interest payments and corporate reorganisations.

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However, under the EU treaties, member states are also obliged to permit freedom of movement of
workers, freedom of movement of capital and freedom to establish business operations within the EU.
These treaty provisions have 'direct effect', ie a taxpayer is entitled to claim that a UK tax provision is
ineffective because it breaches one or more of the freedoms guaranteed under European Law.

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The European Court of Justice has repeatedly held that taxation provisions which discriminate against
non-residents (ie treat a non-resident less favourably than a resident in a similar situation) are contrary to
European Law, unless there is a very strong public interest justification.
There are provisions regarding the exchange of information between European Union Revenue
authorities.

The long term implications of the UK referendum in June 2016 to leave the European Union are not fully
known. However, until the UK has gone through the process of ceasing its membership, European Union
rules will continue to apply to the UK.

3.3.2 Other countries

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In general, the rules of tax jurisdictions of other countries do not have a direct interaction with UK tax.
However, the UK has entered into double tax agreement with various countries, as discussed below.

3.4 Double taxation agreements

Double taxation agreements are designed to protect against the risk of double taxation where the same
income or gains are taxable in two countries.

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FAST FORWARD

Double Taxation agreements between two countries are primarily designed to protect against the risk
of double taxation where the same income or gains are taxable in two countries.
For example, an individual may have a source of income which is taxed in the country in which the
income arose but is also taxed in the individual's country of residence. The agreement could provide
that the income is only to be taxed in one country or that credit is to be given for tax arising in one
country against the tax charge in the other country.

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Double taxation agreements may also include non-discrimination provisions which prevent a foreign
national from being treated more harshly than a national of a country.
Double taxation agreements also usually include rules for the exchange of information between the
different Revenue authorities.

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4 Tax avoidance and tax evasion

FAST FORWARD

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One of the competencies you require to fulfil Performance Objective 17 Tax planning and advice of the
PER is to advise clients responsibly about the differences between tax planning, tax avoidance and tax
evasion. You can apply the knowledge you obtain from this section of the Study Text to help to
demonstrate this competence.

Tax avoidance is the legal minimisation of tax liabilities; tax evasion is illegal.

4.1 Tax evasion

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Tax evasion consists of seeking to pay too little tax by deliberately misleading HMRC by either:

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(a)

Suppressing information to which they are entitled (eg failing to notify HMRC that you are liable
to tax, understating income or gains or omitting to disclose a relevant fact, eg that business
expenditure had a dual motive), or

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Providing them with deliberately false information (eg deducting expenses which have not been
incurred or claiming capital allowances on plant that has not been purchased).

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(b)

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Tax evasion is illegal. Minor cases of tax evasion have generally been settled out of court on the payment
of penalties. However, there is now a statutory offence of evading income tax, which enables such
matters as deliberate failure to operate PAYE to be dealt with in magistrates' courts.

Serious cases of tax evasion, particularly those involving fraud, will continue to be the subject of criminal
prosecutions which may lead to fines and/or imprisonment on conviction.

4.2 Tax avoidance
Tax avoidance is more difficult to define.

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In a very broad sense, it could include any legal method of reducing your tax burden, eg taking
advantage of tax shelter opportunities explicitly offered by tax legislation such as ISAs. However, the term
is more commonly used in a more narrow sense, to denote complex arrangements designed to produce
unintended tax advantages for the taxpayer.
The effectiveness of tax avoidance schemes has often been examined in the courts. Traditionally the tax
rules were applied to the legal form of transactions, although this principle was qualified in later cases. It
was held that the Courts could disregard transactions which were preordained and solely designed to
avoid tax.

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Traditionally, the response of HMRC has been to seek to mend the loopholes in the law as they come to
their attention. In general, there is a presumption that the effect of such changes should not be backdated.
There are disclosure obligations on promoters of certain tax avoidance schemes, and on taxpayers, to
provide details to HMRC of any such schemes used by the taxpayer. This enables HMRC to introduce anti
avoidance measures at the earliest opportunity.

4.3 The distinction between avoidance and evasion
The distinction between tax evasion and tax avoidance should generally be clear cut, since tax
avoidance is an entirely legal activity and does not entail misleading HMRC. However, some tax avoidance
arrangements may be subject to the General Anti-Abuse Rule discussed below.

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Care should also be taken in giving advice in some circumstances. For example, a taxpayer who does
not return income or gains because he wrongly believes that he has successfully avoided having to pay tax
on them may, as a result, be accused of tax evasion.

4.4 General anti-abuse rule (GAAR)
There is a general anti-abuse rule (GAAR) which enables HMRC to counteract tax advantages arising from
abusive tax arrangements.

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FAST FORWARD

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Tax avoidance is usually targeted with legislation which applies in specific circumstances. The GAAR
provides additional means for HMRC to 'counteract' tax advantages arising from abusive 'tax
arrangements', ie arrangements that involve obtaining a tax advantage as (one of) their main purpose(s).
Arrangements are abusive if they cannot be regarded as a reasonable course of action, for example,
where they lead to unintended results involving one or more contrived or abnormal steps and exploit
any shortcomings in the tax provisions.

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Examples of abusive arrangements include those that result in:
Significantly less income, profits or gains
Significantly greater deductions or losses, or
A claim for the repayment or crediting of tax that has not been, and is unlikely to be, paid

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(a)
(b)
(c)

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Relief or increased relief from tax
Repayment or increased repayment of tax
Avoidance or reduction of a charge to tax
Avoidance of a possible assessment to tax
Deferral of a payment of tax or advancement of a repayment of tax
Avoidance of an obligation to deduct or account for tax

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(a)
(b)
(c)
(d)
(e)
(f)

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A 'tax advantage' includes:

HMRC may counteract tax advantages arising by, for example, increasing the taxpayer's tax liability.
HMRC must follow certain procedural requirements and, if it makes any adjustments, these must be on a
'just and reasonable' basis.

4.5 The need for an ethical and professional approach

If a client makes a material error or omission in a tax return, or fails to file a tax return, and does not
correct the error, omission or failure when advised, the accountant should cease to act for the client,
inform HMRC of this cessation and make a money laundering report.

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FAST FORWARD

Under self assessment, all taxpayers (whether individuals or companies) are responsible for disclosing
their taxable income and gains and the deductions and reliefs they are claiming against them.

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Many taxpayers arrange for their accountants to prepare and submit their tax returns. The taxpayer is still
the person responsible for submitting the return and for paying whatever tax becomes due: the
accountant is only acting as the taxpayer's agent.
The practising accountant often acts for taxpayers in their dealings with HMRC and situations can arise
where the accountant has concerns as to whether the taxpayer is being honest in providing information to
the accountant for onward transmission.

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How the accountant deals with such situations is a matter of professional judgement, but in deciding
what to do, the accountant will be expected to uphold the standards of the Association of Chartered
Certified Accountants. He must act honestly and objectively, with due care and diligence, and showing
the highest standards of integrity.
If an accountant learns of a material error or omission in a client's tax return or of a failure to file a
required tax return, the accountant has a responsibility to advise the client of the error, omission or
failure and recommend that disclosure be made to HMRC.

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If the client, after having had a reasonable time to reflect, does not correct the error, omission or
failure or authorise the accountant to do so on the client's behalf, the accountant should inform the client
in writing that it is not possible for the accountant to act for that client.
The accountant should also notify HMRC that the accountant no longer acts for the client but should not
provide details of the reason for ceasing to act.

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An accountant whose client refuses to make disclosure to HMRC, after having had notice of the error,
omission or failure and a reasonable time to reflect, must also report the client's refusal and the facts
surrounding it to the Money Laundering Reporting Officer within the accountancy firm or to the
appropriate authority (National Crime Agency) if the accountant is a sole practitioner.

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Accountants who suspect or are aware of tax evasion activities by a client may themselves commit an
offence if they do not report their suspicions. The accountant must not disclose to the client, or any one
else, that such a report has been made if the accountant knows or suspects that to do so would be likely
to prejudice any investigation which might be conducted following the report as this might constitute the
criminal offence of 'tipping-off'.
You may be asked to explain how you, as a trainee Chartered Certified Accountant, should deal with a
situation where a client is evading tax, for example by not disclosing income or gains to HMRC.

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Exam focus
point

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Chapter Roundup
Economic, social and environmental factors may affect the government's tax policies.



Central government raises revenue through a wide range of taxes. Tax law is made by statute.



Tax is administered by HM Revenue and Customs (HMRC).



The sources of revenue law are Acts of Parliament, Statutory Instruments and case law.



UK membership of the European Union has a significant effect on UK taxes, in particular value added tax
(VAT). This will continue until the UK leaves the European Union.



Double taxation agreements are designed to protect against the risk of double taxation where the same
income or gains are taxable in two countries.



Tax avoidance is the legal minimisation of tax liabilities; tax evasion is illegal.



There is a general anti-abuse rule (GAAR) which enables HMRC to counteract tax advantages arising from
abusive tax arrangements.



If a client makes a material error or omission in a tax return, or fails to file a tax return, and does not
correct the error, omission or failure when advised, the accountant should cease to act for the client,
inform HMRC of this cessation and make a money laundering report.

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Quick Quiz

What is the difference between a direct and an indirect tax?

2

What is an Extra Statutory Concession?

3

How might a double taxation agreement benefit a UK taxpayer who has income arising in a country which
has such an agreement with the UK?

4

Tax avoidance is legal. True/False?

5

When may HMRC use the general anti-abuse rule (GAAR)?

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Answers to Quick Quiz
A direct tax is one charged on income or gains; an indirect tax is paid by a consumer to the supplier, who
then passes it to HMRC.

2

An Extra Statutory Concession is a relaxation by HMRC of the strict rules where their imposition would be
unfair.

3

The agreement could provide that the income is only to be taxed in one country or that credit is to be given
for tax arising in one country against the tax charge in the other country.

4

True. Tax avoidance is legal; tax evasion is illegal.

5

The GAAR may be used by HMRC where a taxpayer has used abusive tax arrangements to obtain a tax
advantage.

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1

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Now try the question below from the Practice Question Bank

Number

Type

Marks

Time

Q1

Section A

2

4 mins

Q2

Section A

2

Q3

Section A

2

4 mins

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4 mins

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1: Introduction to the UK tax system  Part A UK tax system

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P
A
R

B

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Income tax and national
insurance contributions

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